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Auto industry loses sleep over free trade pact with EU

Automobile companies based in India, both homegrown and foreign brands now based here, are opposing the provisions on their sector in the proposed India-European Union free trade agreement (FTA). The Society of Indian Automobile Manufacturers (Siam) says the proposals could wipe out investment plans for the future, disrupting the ‘level playing field’.

Companies such as Tata Motors, Mahindra & Mahindra, Maruti Suzuki, General Motors, Toyota Kirloskar, Honda Siel and others have voiced apprehension over the proposed agreement, which plans to cut duties on vehicles imported to India from the EU. At present, such vehicles cost twice as much as in their home markets after addition of several other duties. The price reduction if the provisions take effect could be more than half.

India's import duty on vehicles is 60 per cent. That of the EU is between 6.5 and 10 per cent. India exported about 230,000 vehicles to the EU in 2011, while the EU exported 6,000 vehicles.

Prakash M Telang, managing director (India operations), Tata Motors, said, "Investments were worked up according to the rules specified by the government. So, you saw manufacturers from different parts of the world coming here. Indian manufacturers also followed in line and made investments accordingly. So, the view was that if you do shift policy, it would, first not be fair to all the players, as it would provide an unlevelled playing field. Second, you might see investments starting to go away from the country, so it doesn't seem a very good move.”

Automotive companies also believe other groups or countries with automotive interests in India could seek a trade agreement on lines similar to the EU. Pawan Goenka, president (automotive and farm equipment sectors), Mahindra & Mahindra, said, "One of the reasons why Siam is opposing it is the fear that once you do it for the EU, then everybody (else) is going to line up for the same. We will then just throw away the auto industry to companies not keen on investing.”

Despite the high tariff in India and the comparatively low tariff in the EU on incoming vehicles, the trade is comparable. In 2010-11, the EU exported $3.4 billion worth of automotive products, including $400 million worth of cars, compared to India's automotive products’ export to EU valued at $3.5 bn, including $1.7 bn worth of cars, stated a Siam report.

Negotiations between India and EU have been on for several months but were stuck on this sector. EU negotiators have stated from the beginning that the FTA can't move ahead by excluding automobiles.

Indian manufacturers also allege any further concession in tariffs on vehicles coming from India would not lead to a substantial increase in growth for Indian vehicles. "Worldwide there is huge over-capacity and European and many other markets are not growing. However, Indian market is growing at a double-digit rate. Other countries like Japan and South Korea will demand a similar facility in their FTAs with India. This is likely to encourage trade, rather than manufacturing,” says the Siam report.